supply chain network - design n.k.agarwal. supply chain network - design network design decisions...

Supply Chain Network - Design

N.K.Agarwal


• Network design decisions are among the most important decisions as their implications are very significant and long lasting

• It is necessary to consider use of all the SCM drivers together to support the competitive strategy of a firm and maximise profits– Facilities– Transportation– Inventory, and – Information


• The design of Supply chain must take into consideration– The distribution network– Facility related decisions that the firm must make while

deciding about location of facilities, allocating capacities and markets to each facility, and

– Uncertainties in financial factors such as prices, exchange rate variation and inflation

Distribution network design

• Distribution refers to steps taken to move and store product from supply stage to a customer stage in the chain

• Distribution occurs between every stage from raw material supply to finished goods to customers

• Distribution costs in U.S.A forms about 20% of the cost of manufacturing

• In India, the distribution cost in the cement industry forms about 30% of the cost of manufacturing and selling cement

• A poor distribution network can hurt the service level while increasing the cost

Is supply chain so simple?

Supplier Manufacturer Distributor Retailer Customer



Upstream Downstream

• Performance of the network can be evaluated from – Customer needs that are met, and– Cost of meeting the customer needs

• Customer service is affected by– Response time

• Time between when a customer places an order to receiving delivery

– Product variety• Number of different products/configurations that a

customer desires from the network– Product availability

• The probability of having a product in stock when a customer order is received

Distribution network design-Factors

– Customer experience • Includes the ease with which the customer can place and

receive their order– Order visibility

• Ability of the customer to track their order from placement to delivery

– Returnability• Ease of returning an unsatisfactory merchandise and the

ability of the network to handle such returns

• Changing the distribution network design affects the following supply chain costs– Inventories– Transportation– Facilities and handling– information


• Transportation costs include inbound as well as outbound transportation costs– Outbound transportation costs per unit tend to be higher

than inbound because inbound lot sizes are typically large

• Increasing the number of facilities generally decreases total transportation cost, whereas– Facility costs decrease as the number of facilities is reduced

as consolidation of facilities enables the firm to exploit economies of scale

• Total logistics costs are the sum of inventory, transportation and facility costs for a supply chain network


• Two key decisions while designing the distribution network– Will product be delivered to the customer location or picked

up from a pre-decided site?– Will product flow through an intermediary or intermediate

location?

• Based upon the above, there are six distinct designs– Manufacturer storage with direct shipping

• Product is directly shipped from the manufacturer to the end customer, bypassing the retailer (who takes the order and initiates the delivery request)

• Also known as drop-shipping with product delivered directly from manufacturer to the customer location

Distribution network –Design Options

Manufacturer storage with direct shipping

Manufacturer

Customers

Retailer

• Drop Shipping

– Manufacturer storage with direct shipping and in-transit merge• Combining pieces of the order coming from different

locations so that the customer gets a single delivery • Transportation costs are lower than drop-shipping as the

merger takes place at the carrier hub prior to delivery to the customer

– Distribution storage with package carrier delivery• Inventory is not held by the manufacturer at the factories

but is held by distributors/retailers in intermediate warehouses and package carriers transport products from this intermediate location to the final customer

– Transportation costs will be somewhat lower for this option compared to manufacturer storage as an economic mode of transport can be employed for inbound shipments to the warehouse closer to the customer


Manufacturer storage with direct shipping and in-transit merge

Manufacturer

Customers

In-transit Merge by carriersRetailer

Distributor storage with carrier delivery

Manufacturer

Customers

Warehouse Storage by Distributor/Retailer

– Distributor storage with last mile delivery• Distributors or retailer delivering the product to the customer's

home instead of using a package carrier– Ex. Grocery industry

• Requires higher levels of inventory compared to the other options (except for retail stores) as it has a low level of aggregation

– Transportation costs will be the highest using last mile delivery

– Manufacturer/ distributor storage with customer pickup• Inventory is stored at the manufacturer or distributor warehouse• Customers place their orders online or on the phone• Customers come to the designated pickup point to collect their

orders


– Inventory costs can be kept low with either the manufacturer or distributor storage to exploit aggregation

» Transportation costs is lower than any other solution using package carriers as significant aggregation is possible when delivering orders to a pickup site

– Retail storage with customer pickup• Inventory is stored locally at retail stores

• Customers walk into the retail store or place an order online or on phone, and

• Pickup the goods at the retail stores

– Ex. Grocery stores

» Local storage increases inventory costs

» Transportation cost is lower than other solutions as cheaper modes of transport can be used to replenish the product at the retail stores


Distribution Network Design- Final Selection

• Most companies use a combination of delivery network

• The network is tailored to match the characteristics of the product or the needs of the customers– Fast moving and emergency items are stocked locally, and

• Customers can either pickup from stores directly ,or• Have them delivered depending upon the urgency

– Slow moving items are stocked at a regional distribution center from where they are shipped to the customer with in a day or two

– Very slow moving are typically drop-shipped from the manufacturer and involve a longer lead time

• Ranking of various network relative to each other along different dimensions: – Ranking 1 give best performance against a specific

dimension and higher ranking means increasingly inferior performance

Parameter

Retail Storage with Customer Pickup

Manufacturer Storage with Direct Shipping

Manuf. Storage with In-Transit

Dist. Storage with Package Carrier Delivery

Dist. Storage with last Mile Delivery

Manuf. Storage with Pickup

Response Time 1 4 4 3 2 4Product variety 4 1 1 2 3 1Product Availablty 4 1 1 2 3 1Cust. Experience 5 4 3 2 1 5Order Visibility 1 5 4 3 2 6Returnability 1 5 5 4 3 2Inventory 4 1 1 2 3 1Transportation 1 4 3 2 5 1Facility & Handlng 6 1 2 3 4 5Information 1 4 4 3 2 5

Comparative Performance of Delivery Network Design

Supply Chain Network Design – Facilities/Suppliers

• Network design addresses the issue of determining– The number and types of facilities a firm will operate– Their location, and– How these will be operated?

• Key decisions while planning the network– Determining the number of plants– Determining the number of warehouses– Determining the size of each warehouse– Allocating space for products in each warehouse– Determining which products customers will receive from

each warehouse– Selection of transportation mode


• Role of facility decisions in a Supply Chain• Facility location decisions

– Needs huge investments and as such it is expensive to close down or shift a facility to a different location

– A good location decision can enable a supply chain to be more responsive to customer requirements and at the same time cost effective

– A poorly located facility affects the supply chain efficiency

• Capacity allocation decisions– Capacity decisions can not be changed frequently though

minor changes can be accommodated– Too much capacity in a facility may result in poor utilisation

and thereby higher costs


– Too little capacity results in poor responsiveness if demand is not fulfilled

• This may result in higher costs if unmet demand is met from alternate location

• Allocation of supply sources and markets– Has a major impact on performance as it affects total

production, inventory and transportation costs incurred by the chain while satisfying customer demand

– Need a review whenever market conditions or plant capacities change and allocation of supply sources and market can be changed accordingly

– Facility must be flexible enough to serve different markets and receive supply from different sources


• Factors affecting network design decisions related to facilities– Strategic factors

• Firms having the strategy of cost leadership will tend to locate their facilities at the lowest cost location even if these are far away from the markets

• On the other hand, firms having quick response strategy will tend to locate facilities nearer to the market even if that amounts to locating in high cost locations

• Strategy of convenience stores is to provide easy access as part of their competitive strategy

• Global supply chain networks consist of facilities in different countries having different roles to play and different objectives to achieve


– Technological factors• If production technology provides significant economies of

scale, a few high capacity locations are most effective• If facilities have lower fixed costs, many facilities having small

capacities are located well dispersed in the market to keep transportation costs low

• If technology is flexible, manufacturing can be consolidated in a few large facilities

• If not flexible, and product requirements vary from country to country, a firm has to set up local facilities to serve local markets in each country

– Macroeconomical factors• Tariffs

– If a country charges high tariffs, firms either do not export goods to that country or setup manufacturing plants locally to avoid tariffs


• Tax incentives– Developing countries provide free trade zones where

duties and tariffs are relaxed for products produced solely for exports

• Exchange rate risk and demand risk– Flexibility provided in some over-capacity plants

helps in meeting changes in demand at lower costs and also to produce more in facilities having lower cost based on current exchange rates

– Political factors• Preference for locating facilities in countries having

stable government and clearly defined commercial laws and other legal systems

– Infrastructural factors• Availability of good infrastructure is an important consideration

for locating a plant in a certain area– Competitive factors

• Competitor’s strategy , capacity and location should be considered while deciding location

– Logistics and facility costs• Depend upon the number of facilities, their location and

capacity• Firm to consider inventory, transportation and facility costs

while designing the network– Operating costs

• Fixed costs– Leasing or construction costs

• Variable costs– Costs associated with production or warehousing

operations


Network Design Decisions- A Framework

• Global network design decisions are made in four phases

• Phase I• Define a supply chain strategy

– A firm’s supply chain strategy specifies what capabilities the network must have to support its competitive strategy

– Company defines the set of customer needs that it seeks to satisfy through offering its products and services to them

• To achieve maximum possible customer satisfaction and customer retention

– Supply chain strategy determines the nature of procurement of raw materials, transportation of materials to and from the firm, manufacturing the product or operation to provide service, distribution of the product and after sales service to the customer


– It includes supplier strategy, transportation strategy and logistics strategy

• Phase II• Identifying the regions where facilities will be located

and defining their roles and capacities– Starting point is the forecast of demand country wise which

specifies the size of the demand and whether the customer requirements are homogenous or not across the country

– Large facilities in case of similar demands but smaller localised facilities to meet varying customer demand across countries

– Large facilities at few places if benefit of economy of scales can be exploited

• Or else, smaller facilities to serve localised markets


– Trade barriers in each region or country– Competitor’s facility locations

• Firm identifies the configuration of regional facilities to decide upon the number of facilities, location, capacities and the product-mix to be produced in each factory

• Phase III• Selecting desirable sites for locating the facilities

– Major considerations in selecting the suitable sites• Availability of infrastructure to support production

technologies– Availability of suppliers, transportation services,

communication services, warehousing, utilities, skilled labour, community attitude etc.

• Phase IV• Choosing the final locations for facilities and

allocating capacity to each factory– The network is designed to maximise the total profits or

minimise total costs taking into consideration the expected profit margins and demand in each market

– The various logistics and facility costs should also be considered


Competitive Strategy

Global Competition

Tariffs & Tax Incentives

Regional Demand. Size, Growth, Homogeneity, Local Specs

Political, Exchange Rate,& Demand Risk

Available Infrastructure

Logistics Costs. Transport, Inventory, Coordination

Factor Costs. Labour, Materials, Site specific

Production Methods. Skill needs, response time

Competitive Environment

Production Tech. Cost, scale/scope impact, support reqd. Flexibility

Internal Constraints. Capital, growth strategy, existing network

Phase I : Supply Chain Strategy

Phase II : Regional Facility Configuration

Phase III: Desirable site

Phase IV: Location Choices

Network Design Decisions – A Framework

• Do not under estimate the life span of facilities– Facilities last a long time and have a major impact on the firm’s

performance– Location of warehouses or storage facilities , not owned by the firm,

can be changed within a year of making a decision but change in facility locations are very expensive

• Do not gloss over the cultural implications– Culture at a facility will be influenced by other facilities in the vicinity– Location of a facility has a significant effect on the extent and form

of communication that develops in the supply chain network– Locating a firm away from head quarter gives it more of cultural

autonomy and is beneficial if the new division starting needs to function in a different manner from the rest of the company

– Locating two facilities close together can encourage communication between them

Network Design Decisions

• Do not ignore quality of life issues– Quality of life at selected facility influences the work force

available and their morale

• Focus on tariffs and tax incentives when locating facilities– Especially for international locations, many times tax

incentives drive the location overcoming all of the other factors combined

Network Design Decisions

Supply Chain Network

• Companies must create and maintain the most efficient supply chain possible to compete and succeed in today’s demanding marketplace

• Strategic supply chain design and analysis must consider a wide range of alternatives, including– Site locations, – Product mix, – Transportation, – Inventory deployment, – Suppliers, – Cost-service levels, and– Constraints, as well as – Supply chain operations.

MNC supply chain in India - Localising

• A number of MNCs have been operating in India for some time

• Most of these have adopted strategies to suit the Indian conditions

• Nivea– Almost 80 percent of Nivea products are imported into the

country– Some of its products are now , however, manufactured

locally through third party contract manufacturers – For this, it sources and imports the essential raw material,

components and the packaging material

– The company operates a total of 13 warehouses in the country, to compensate for the highly fragmented nature of the market

– Also, India is perhaps the only country where it continues to manufacture and offer its legacy talcum powder because of the consumer demand

– Most of the FMCG companies in India are reworking their supply chains both inward as well as outward to a great extent

• Dell Computers– Bulk of Dell’s supply chain practices are decided globally,

but in terms of how they actually do the distribution in a specific country is decided locally

– They are free to set up warehouses, create their own networks and distribution channels and not follow any preset norms.


• McDonald– McDonald’s have had to create supply chains from scratch

before they could open their first outlet in India– They had to do this so that they could provide the

consistency and quick service that end-customers would expect from McDonald’s anywhere in the world

• Nestle India– Despite being an outsider, Nestle in India seems just as

Indian as any other FMCG company of native roots– No matter where you go in India, you can never be too far

away from a Maggi, a Nescafe, Kitkat or a Polo


– Some of the key supply chain priorities for the company are reduction in the finished goods inventory pipeline to improve freshness of stocks and lower working capital, control on distribution costs through innovative measures and reduction in obsolescence of materials

• Acer India– One of the world’s leading branded PC vendors Acer has

become one of the top selling brands in the Indian subcontinent

– Acer doesn’t have any manufacturing facilities in the country and relies solely on its distribution capabilities to compete with other vendors in the country


– Acer facilitates quick turn around time to its customers and fresh technology by using just-in-time inventory (JIT)

– Critical success factors in their outsourcing model is identifi-cation of right partner with long term commitment

– Also the business model offered is extremely viable for the partner


Global supply chains by Indian companies

• Tata Motors – Tata Motors have been purchasing automotive components

from places like Malaysia, China, South Africa and Thailand in the last few years

– It’s also been sourcing steel from countries including Russia, China, Belarus, Japan, and South Korea

• Bharat Forge– Component manufacturer Bharat Forge have already built

one such chain– Its worldwide plants in Germany, Sweden, Scotland, US,

China and India work with one global supply chain wherein all its procurement is presently coordinated through its Germany based global purchase manager

Global supply chains by Indian companies

• Steel Manufacturers– Tata Steel and Ispat have been purchasing coal from places

such as South Africa, Nigeria and Mozambique to run their Indian plants

• FMCG– Emami is sourcing critical chemical ingredients from US and

Spain.

• Nitco– Tiles manufacturer Nitco already has a contract

manufacturing agreement with a China based manufacturing company

• Croma– Tata Group’s consumer electronics retail arm, Croma’s

sourcing is handled by its Australian partner

References

• Logistics and Supply Chain Management : K. Shridhara Bhat

• Supply Chain management : Chopra / Meindl• Google Web Site

Thank You

supply chain network - design n.k.agarwal. supply chain network - design network design decisions...

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